Why It's Time to Buy Google Inc. (Nasdaq: GOOG)

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By announcing its plans to buy Motorola Mobility Holdings Inc. (NYSE: MMI) yesterday (Monday), Google Inc. (Nasdaq: GOOG) is forcing me to make a statement that I never thought I would make: It's time to buy Google.

The $12.5 billion deal will see Google acquire the phone-making half of the Motorola Inc. spin-off that took effect in January. Google is paying $40 a share in cash – about a 63% premium to Motorola Mobility's closing price on Friday. The deal – which Google says will help it "supercharge" its Android smartphone business – will close late this year or early in 2012.

I used to look at Google as the next Microsoft Corp. (Nasdaq: MSFT). But Google has achieved a status that Microsoft shot for – and missed: It's become an online leader and a factor in the everyday life of consumers. Google also has massive growth potential available, and hasn't quit trying to grow.

And that's a good reason – perhaps the best reason – to own Google today and into the future.

Google's purchase of Motorola Mobility will showcase this potential. It positions Google to pair Motorola smartphones with its Android software and compete against iPhone-maker Apple Inc. (Nasdaq: AAPL).

However, Google's new purchase does a lot more than dangle a bigger slice of smartphone market share – and this reason is why I finally decided Google is a "Buy." (**).

Motorola Mobility: All About the Patents

The game-changing benefit for Google in the Motorola Mobility deal is the intellectual property Google is picking up. We are talking about 17,000 patents in this purchase.

A stronger patent portfolio allows Google to reduce royalty costs by using cross-licensing agreements with handset makers. And it protects the Android smartphone market from getting slammed with patent fees (and lawsuits) as sales continue to climb.

The number of Android-software-powered phones jumped 300% last quarter.

Motorola Mobility's patent portfolio will enable Google to move to hardware design for its Android phones. That will give Google both the phone operating system and the intellectual property to act as a gatekeeper in the mobile space.

By announcing its plans to buy Motorola Mobility Holdings Inc. (NYSE: MMI) yesterday (Monday), Google Inc. (Nasdaq: GOOG) is forcing me to make a statement that I never thought I would make: It's time to buy Google.

The $12.5 billion deal will see Google acquire the phone-making half of the Motorola Inc. spin-off that took effect in January. Google is paying $40 a share in cash – about a 63% premium to Motorola Mobility's closing price on Friday. The deal – which Google says will help it "supercharge" its Android smartphone business – will close late this year or early in 2012.

I used to look at Google as the next Microsoft Corp. (Nasdaq: MSFT). But Google has achieved a status that Microsoft shot for – and missed: It's become an online leader and a factor in the everyday life of consumers. Google also has massive growth potential available, and hasn't quit trying to grow.

And that's a good reason – perhaps the best reason – to own Google today and into the future.

Google's purchase of Motorola Mobility will showcase this potential. It positions Google to pair Motorola smartphones with its Android software and compete against iPhone-maker Apple Inc. (Nasdaq: AAPL).

However, Google's new purchase does a lot more than dangle a bigger slice of smartphone market share – and this reason is why I finally decided Google is a "Buy." (**).

Motorola Mobility: All About the Patents

The game-changing benefit for Google in the Motorola Mobility deal is the intellectual property Google is picking up. We are talking about 17,000 patents in this purchase.

A stronger patent portfolio allows Google to reduce royalty costs by using cross-licensing agreements with handset makers. And it protects the Android smartphone market from getting slammed with patent fees (and lawsuits) as sales continue to climb.

The number of Android-software-powered phones jumped 300% last quarter.

Motorola Mobility's patent portfolio will enable Google to move to hardware design for its Android phones. That will give Google both the phone operating system and the intellectual property to act as a gatekeeper in the mobile space.

In fact, Apple and Microsoft could end up facing some significant competitive issues in the future if Google can find a national cell-tower company for sale to round out its build-out plans.

Were that to happen, Google would be positioned as a behemoth. At that point it would be a single source for wireless communication solutions.

We're talking about a company that could set its own standards in the world of mobile technology. And Google has the cash hoard to make it happen.

Plus, it looks like it's using its cash wisely, getting a great deal for its patent protection.

An analysis from Bloomberg finance and tech expert Dr. Paul Kedrosky said it appears at first glance that Google paid about $412,000 per patent, compared to $750,000 per patent in the Nortel auction. This means Google – which started the Nortel patent bidding at $900 million before giving up – paid almost 50% less per patent than the total a group of companies, including Apple and Microsoft, paid for 6,000 Nortel patents.

Nothing like paying less to buy more; if Steve Jobs isn't blinking today, he has lost his edge.

Google Inc.: Four More Reasons to Buy

The Motorola Mobility deal isn't the only reason to like Google. In fact, I can give you four other compelling reasons to like Google's stock, including:

  • The company's ad network package.
  • Its Chrome browser.
  • Its earth-mapping operations.
  • And its top online search position.

The Mountain View, CA-based Google, founded in 1998, has assembled a package of online-service providers, giving consumers a one-stop shop for everything a Website needs. Google's providers track your Web traffic, let you shop your Web ad space, and control the ad-placement process.

This allows people with active, high-traffic blogs to generate some personal cash flow from what is really a hobby site. If you can build it, Google can give you a turnkey-business process for your Website.

Google also has developed a third option to the Microsoft Internet Explorer vs. Mozilla Firefox browser war. The Google browser is part of the Chrome package of software that the company has made available as an alternative to Microsoft's product package.

It's also constantly updating its Maps feature, a free source of high-altitude photos that you once had to be "the government" to access. Google Maps has a fleet of vehicles traveling around, documenting a "street view" of the world. And it adds that info to other databases, too.

You can now type your home address into a search engine and get a street view of your driveway (well, if you live on a main thoroughfare), or see how an area has developed over time by viewing a series of historical shots.

All of the these capabilities grew out of Google's core competency, which is providing people with a clean, fast search engine – for free.

What an interesting business model…

Google has a market cap of $177 billion, with an enterprise value of $152 billion, once you take into consideration net cash and debt levels. The company currently has $39 billion in cash, with total debt listed as $6 billion as of the most recent quarter.

Google reported revenue of $33.33 billion for the most recent 12-month period. This generated total revenue per share of $103. The company currently has a book value per share (BV/S) of $161 based on most recent quarter.

Google shares fell $6.54 each, or 1.16%, to close at $557.23. They've traded between $447.65 and $642.96 in the last 52 weeks, meaning the stock is about 13% below its 12-month peak.

Action to Take: Buy Google Inc. (Nasdaq: GOOG)(**).

In this extremely volatile market, with stocks moving up and down by 4% to 5% per day, a patient investor could start to build a secure position in Google, if they haven't already.

I would pick up 50% of your intended position right now, with a good-"til-cancelled order 10% lower than your current entry for the remainder. This gives you a nice, blended entry price, should this volatility continues for a while longer.

I like to find investments that will help provide security during these turbulent times, and Google fits the bill. The search giant has a healthy $39 billion in cash on its balance sheet to help fund its growth and research & development costs. It will not be going out of business, and if the market crashes, it would not go to zero and stay there.

Those are comforting attributes in today's uncertain economy.

(**) Special Note of Disclosure: Jack Barnes has no interest in Google Inc. (Nasdaq: GOOG).

[Editor's Note: We're making $26,000 of our very best investment advice available to charger subscribers of our new Private Briefing service - for $5. Each day, Money Morning Executive Editor William Patalon III has one-on-one "private briefings" with our individual gurus. This new service is designed to provide readers with access to some of those briefings. We're offering this special rate to charter subscribers. To find out more, please click here.]
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column, Barnes analyzed Kraft Foods Inc. (NYSE: KFT).

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  1. GOLDFINGA | August 16, 2011

    Wouldnt it be great if google would split shares ?????????

  2. Sylvia Simmons | August 16, 2011

    Where can I go to buy Google stock?

  3. MB | August 16, 2011

    I am in the process of buying a new smartphone from TMobile. Motorola is not on my short list.

    Isn't it true that Google is purchasing a company that may in future have some potential but right now is not making atractive products. A lot of effort needs to be made to make Motorola a market leader or even competetive. That may divert Google away from their core product line.

    Is Google just making a defensive move that it can not avoid? Maybe the author can comment on that.

  4. Mike | August 16, 2011

    I think it's a good idea for Google to split shares. For time being the low and midel incomes do not benefit from Google's success. It's better for Google give them direct chance to participate in the rise of Google's capitalization. Mike

  5. foxxx333 | August 16, 2011

    Splits do not affect value; however, if commissions are based on cents per share, a 2:1 split doubles cost of purchase or sale. Regarding location to purchase, try your local or an on-line broker. If you really were asking a serious question, stop in at your local psychiatrist. Hedging trade alert: Buy AAPL and GOOG. Sell short: HPQ and RIMM in equal dollar amounts (e.g. $25k long and $25k short in each position). Apple and Google should outperform both Hewlett Packard and Research in Motion. If market tanks, your net value should slightly increase. If market moves up, your net value should increase. I say should, because I could be wrong. Remember to do your own due diligence.

  6. Pieter | August 17, 2011

    I have the opposite take on the purchase. It seems as though Google's strategy may be to integrate Motorola handset with Android in order to better compete with Apple's iPhone. This will drive Samsung, HTC and many others to Microsoft. The Android market share will be seriously hurt by this.
    Google should take the Motorola IP and sell the rest of Motorola.

  7. playablanca_panama@yahoo.com | August 21, 2011

    Pieter I agree with you.

    I do not think these guys, who are nerds to the max, are stupid enough to take on a product that crushes the closest competition to Apple.

    Apple has its own soft underbelly as they typically try to get too close and start interbreeding which is not healthy, it destroyed them once and the buzz in the tech world is that it is happening again. Competition is healthy!

    Mary

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